International Business
The international business domain tests why nations trade, how trade is measured and restricted, how firms enter foreign markets, and how currency movements change the deal.
Why trade: absolute and comparative advantage
Absolute advantage means producing more with the same inputs. Comparative advantage means producing at a lower opportunity cost, and it is the basis for mutually beneficial trade even when one country is better at everything. The terms of trade determine how the gains are split between partners.
Measuring trade
The balance of trade compares merchandise exports and imports (a deficit when imports exceed exports). The balance of payments is broader: the current account (goods, services, income, transfers) plus the financial and capital accounts must net to roughly zero because outflows are matched by inflows. A trade deficit is offset by capital inflows.
Barriers and promotion
Tariffs tax imports; quotas cap quantity; embargoes ban trade with a country; subsidies help domestic producers; standards and licensing act as non-tariff barriers; dumping is selling below cost or below home-market price. Free-trade agreements such as USMCA, the EU, and ASEAN lower barriers among members while creating trade diversion against outsiders.
Entry modes
Ranked by commitment and risk: indirect exporting, direct exporting, licensing (technology for royalties), franchising (business format abroad), joint venture (shared ownership with a local partner), and foreign direct investment (wholly owned subsidiary). Higher control usually costs more capital and exposes more assets.
Exchange rates
When the dollar strengthens (fewer dollars per unit of foreign currency), U.S. exports become more expensive abroad and imports cheaper at home, hurting exporters. When it weakens, exporters gain price competitiveness.
Worked example
A U.S. firm sells equipment for €100,000, payable in 90 days. At $1.10 per euro it expects $110,000. If the euro falls to $1.05, the same sale yields $105,000 - a $5,000 transaction loss. The firm could hedge with a forward contract, invoice in dollars, or require faster payment.
Traps
Treating the trade balance as the whole balance of payments; confusing comparative with absolute advantage; assuming a strong currency is always good for business; and forgetting that licensing earns royalties while FDI earns full profit but carries full risk.